The Financial Review Commission that oversees Detroit’s post-bankruptcy finances on Friday approved the city’s Four-Year Financial Plan, setting the stage for the city’s exit from direct state supervision later this month.

While the city retains junk-level ratings and struggles lay ahead, the approval marks the final benchmark the city needs to fulfill in order for the FRC to consider waiving its oversight power. The oversight body and criteria for restoring self-control were part of the city’s restructuring plan.

Children play in the sand at Campus Martius park in downtown Detroit, Michigan, U.S., on Monday, Oct. 5, 2015.
A state commission approved Detroit's four-year financial plan, setting the stage for the city's exit from direct state oversight. Bloomberg News

“Today's FRC approval of the City's 2019 budget and plan for fiscal years 2020-2022, is another key milestone in the city's financial recovery,” Detroit Chief Financial Officer John Hill said in an emailed statement. “It demonstrates the continued commitment of city leaders to prepare and enact budgets that are realistic and balanced now and into the future. It also demonstrates continued progress toward the waiver of active State oversight, which we expect will occur later this month."

The FRC is scheduled to meet again on April 30 to vote on waiving oversight. The city will have come full circle from the beginning of state oversight that led to the appointment of an emergency manager who took the city into a state-approved Chapter 9 filing, but the state will remain on guard. The commission will not be disbanded; instead it will go into a dormancy stage in case Detroit finances took a turn for the worse.

Detroit is the only Michigan city still under a form of state oversight. After 18 months, the city ended what was then the biggest-ever U.S. municipal bankruptcy filing in December 2014 after shedding about $7 billion of its $18 billion of debt and obligations.

As part of its approved plan of debt adjustment, Michigan mandated the appointment of the commission to oversee the Motor City’s finances, including budgets, contracts, and collective bargaining agreements with municipal employees.

Hill said there will most likely be a memorandum of understanding between the city and FRC related to future information that the FRC would receive for review. “They still can at any time decide to change the waiver, although we hope and will make sure that doesn’t happen,” said Hill.

The now approved financial plan includes Mayor Mike Duggan’s budget for fiscal 2019 that begins on July 1 and three forecasted years- FY 2020, FY 2021, and FY 2022. Hill said that the city projects ending the current fiscal year with an operating surplus of $33 million, marking the city’s fourth straight budget surplus since exiting bankruptcy. It was among the milestones required to free itself from the commission’s supervision.

The $2 billion balanced budget maintains more than a 5% reserve that is projected at $62.3 million. The city’s general fund — budgeted at $1 billion — continues to do well because income tax revenues are increasing, Duggan said.

The city also continues to put aside money to deal with higher-than-expected pension payments starting in 2024 when annual payments of at least $143 million begin. Payments of $20 million run through 2019 with no payments then due through 2023.

In March, the city redeemed the outstanding principal on its Financial Recovery Bonds, Series 2014C, which saved the city $11.7 million in interest expense.

Detroit currently has $1.8 billion in outstanding bonded debt, excluding Detroit Water and Sewerage Department debt obligations. Debt service is currently about 6.4% of the general fund budget. The city has access to the credit markets through the Michigan Financing Authority. DWSD has access to the market through the Great Lakes Water Authority, which absorbed the city department’s outstanding bonds and covers the DWSD capital program. The authority bonds are repaid with revenues from rate payers.

Detroit’s bond ratings, though still deep in junk territory, were upgraded last year. On Dec. 21, S&P Global Ratings upgraded the city’s issuer credit rating to B-plus. The outlook is stable. Moody’s Investors Service upgraded Detroit to B1 from B2 in October.

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